Car finance commission linked to the interest rate paid by customers will be banned in early 2021 by the Financial Conduct Authority.
So-called discretionary commission models allow some car dealers and finance brokers to increase the interest rate paid by a customer.
They receive more commission as a result.
This, however, costs customers more: previous estimates suggest £500m of customer harm may have been caused by discretionary commission models.
“Widespread use of this type of commission creates an incentive for brokers to act against customers’ interest,” said the FCA.
The FCA estimates the ban, which comes into force on 28 January 2021, will save car finance customers £165m a year.
Christopher Woolard, FCA’s interim chief executive, said: “By banning this type of commission, where brokers are rewarded for charging consumers higher rates, we will increase competition and protect consumers.”
Car finance customers will also receive more comprehensive information about the commission they are paying to the dealer or broker.
Earlier in July, the FCA also extended payment freezes for car finance customers struggling due to the coronavirus crisis for a further three months.